After a long career at Barron's, I joined Forbes as San Francisco bureau chief in December 2010. I've been writing about technology and investing for more than 25 years. With the Tech Trade, I've picked up where I left off when I was writing the Tech Trader Daily blog at Barrons.com. When I'm not working, you can find me riding my road bike around the Bay Area hills, managing my fantasy baseball team, rooting for my beloved Phillies and Eagles and hanging out in the Valley with my family. You can follow me on Facebook, on Twitter (@savitz), and on Google+.

Netflix: Was The Subscription Price Change A Giant Mistake?

Did Netflix make a big boo-boo with its decision to shift to charging separately for its streaming and DVD businesses?

That’s what the Street is trying to figure out after the company this morning revised its Q3 subscriber guidance. While Netflix didn’t change its financial forecast, it reduced expectations for subscriber growth, a vivid demonstration of just how angry the company made some customers with the shift in pricing. Meanwhile, the Street has other concerns. For one thing, there are worries that the acquisition of Hulu by a deep-pocketed buyer – Google, say – could create a much more formidable competitor in the streaming video sector. And there are also worries that the arrival of an Amazon tablet – expected later this year – could make the online retailer’s nascent video streaming offering into a more serious threat. On the other hand, some analysts note that the drop in subscribers is not that surprising, and that we might be seeing an acceleration of the shift from DVD rentals to streaming, which is something Netflix seems to be encouraging.

So what to do with the stock now?

Here’s what of the Street analysts think, starting with the bulls (who seem to be outnumbered at the moment):

Michael Olson, Piper Jaffray: He keeps his Overweight rating, but cuts his target to $305, from $330. “We continue to believe Netflix raised prices on its DVD plans in order to push the sub base further toward streaming,” he writes. “With today’s updated guidance, it appears that this is happening. While the DVD/streaming puts and takes have been slightly different than the company expected, the drop in DVD subs was expected and somewhat intended. That said, the company needs to see an offsetting uptick in streaming subs and that has not yet happened.”

Nat Schindler, Bank of America/Merrill Lynch: He keeps his Buy rating. “This is NFLX’s first downward revision in subs, clearly not a positive sign, but given this drop, we believe much of the volatility caused by the recent pricing change is already priced in,” he writes. “We continue to believe the company and the stock will be driven in the long-term by total streaming subs which we believe could more than double in the U.S. over the next few years. As streaming subs increase, NFLX should have more margin room to buy fixed price content and further differentiate itself from potential competitors.”

Jamie Townsend, Town Hall Research: He keeps his Buy rating. “We continue to believe that separating the DVD and streaming customer base is a sound long term move,” he writes. “We appreciate the short term impact that this move is having on churn and subscriber growth as a small portion of the customer reacts negatively to what for them is a price increase. However, in our view the impact does not fundamentally change the positioning of Netflix as the best investment in the still early stages of a worldwide streaming video explosion. While the DVD business was a critical aspect of Netflix’s early business model, the company needs to move away from the lower margin mailing business in order to better position itself to reap the fullest benefits of the expansion of its streaming model in the U.S. and increasingly around the world. We believe that the Latin American expansion remains on track and that expansion into Europe will occur in early 2012. We do not the ignore potential for competitors entering this market but also believe that the company has well positioned itself to expand into newer markets ahead of others.”

And now some of the bears:

Youssef Squali, Jefferies: “While Netflix’s leadership in online streaming should remain uncontested for a long time, we believe that a combination of the recent price hike, a less favorable competitive environment, and aggressive international expansion raises the risk profile of the stock,” he writes, repeating his Neutral rating. He adds that the next shoe to drop could be the completion of the auction for Hulu; he thinks Google could be the buyer, a scenario he thinks spells trouble for Netflix.

Tony Wible, Janney Capital: He keeps his Sell rating. “We believe it will be increasingly more difficult to support its high valuation in the face of headwinds tied to Usage Based billing, a deceleration in sub growth, and an increase in competition that will likely trigger an increase in content costs and SAC [subscriber acquisition costs],” he writes.

Scott Devitt, Morgan Stanley: Maintains an Equal Weight rating. “We think investors have time to assess the situation and we do not recommend blindly buying into today’s lower share price,” he writes. Devitt thinks the next risks will be competitor consolidation and the debut of the Amazon tablet.

George Askew, Stifel Nicolaus: Hold rating. “We believe we are seeing temporary churn related to the pricing change, but not a long-term crack in the business model,” he writes. “The company’s facts show the company’s subscriber mix is shifting even more rapidly to the streaming service. This trend should be positive for the company’s franchise and margins as spending on postage and fulfillment can more quickly be shifted to streaming content purchases. The real message here is that the DVD is even more dead than we thought; short the post office, but support your local postal worker.”

Ryan Hunter, Wedge Partners: He thinks the weak guidance has less to do with the price increase and instead reflects organic slowing of subscriber growth. “We have maintained for some time that NFLX’s growth expectations should be similar to those of pay channels like HBO, Showtime, Cinemax, etc. Once those services reached the subscriber levels that NFLX is approaching, their growth rates have leveled off.”

Charlie Wolf, Needham: “We continue with an Underperform rating on the expectation that competition in the streaming content market will eventually intensify.”

Barton Crockett, Lazard Capital: “We see streaming competition ramping up over time,” he writes. “The Hulu sale could prove a catalyst, especially if reports that there may be an aggressive buyer for the property, plus expanded video rights, pan out. A Hulu buyer could potentially lock up exclusive TV rights from Hulu partners – Disney, NBC, Fox – that restrict Netflix’s ability to renew its 1- year duration TV deals with these studios. Netflix’s appeal to consumers may also be affected by the end of February 2012 loss of Starz content, and the recent loss of Sony movies from the Starz deal.”

NFLX is down $33.75, or 16.2%, to $174.96. I would note that that with today’s decline, the stock is now off $129.83, or 42.6%, since hitting an intra-day high of $304.79 on July 13. The company has a relatively modest market cap of $9.2 billion; compare that with, say, the $19 billion market cap for Yahoo. If the stock keeps sliding, at some point you might start hearing takeover speculation resurface…and don’t be surprised if the focus as usual turns to Microsoft, where Netflix CEO Reed Hastings is a member of the board.

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I knew this was going to happen with netflx I canceled mine. I refuse to go back even if they fix their price. I refuse to do any business with stupid companies that make god awefull decissions. No kidding streaming didn’t pick up. Their streaming is not of the latest movies or shows. I have my streaming still and am about to cut the ties on that as well they just don’t have enough new stuff to keep me interested. Netflix has made a seriously bad move.

Netflix’s loss of the Starz deal is a big problem too. It really cuts back on the number of newish movies they can offer and (IMHO) makes the streaming service less desirable. I’m kind of regretting my decision to end my DVD service with them to rely on streaming — a service that at the moment seems to be getting weaker instead of stronger.

I did the same thing–dropped the DVDs for streaming only. But I find the selection quite limited. I would drop that too except my daughter seems to like some of their old TV fare. Netflix is on thin ice right now.

Netflix is an “extra” that people subscribe to. With so many people getting laid off/losing jobs is this a surprise that people were upset about raising the prices. Extremely bad timing. Netflix is slow to get new releases and the streaming is limited but yet they raise the prices.

Over a year ago I got rid of satelite TV, installed a OA antenna and relied on Netflix for all my DVDs and streaming.

I’ve canceled my DVDs, and am close to canceling the streaming, mainly because of the 1 device streaming limit. I own 2 Rokus, 1 android phone and 3 computers, and being able to only stream to 1 of those at a time is very aggravating. If they increased it to two devices, I would have no complaints at all with the cost of the streaming, although 3 would be even better :)

A few months ago we gave HULU a try. Mainly because Comedy Central was available. I’m able to get Tosh.o, colbert and the daily show. I’m moderately happy with Hulu. The software sucks for the devices, the commercials are a pain as well, but you can stream to multiple devices, which is a positive. Some shows will not come up using the Roku, which is a negative, but hopefully that will change.

I want value for my hard earned dollar. It’s hard to find it. Consumers have very few choices, it’s usually bad or worse. This system were in does not promote value, nor does it promote innovation. It’s all about quick profit and wasteful spending by the corporations. Most of the things we buy are either poorly built, or the customer service sucks. We have all of this great technology, and it’s wasted on shoddy workmanship and apathy.

Last year, even before the latest price increase, Netflix made a subtle change to its fee structure to try to get people to migrate to stream content. At that time, I was signed up for the unlimited one-disc-at-a-time plan for $8.99/month. When they first launched their stream service, it was available to anyone with a DVD plan priced at $8.99/month or higher for no extra charge. I started to browse the stream library several times a week and found that there was very little content that I wanted to watch. When they increased the price of the plan to $9.99/month and as an alternative, offered a stream-only plan for $7.99/month. I called Netflix to voice my dissatisfaction. I told them that their stream library was not worth $7.99/month, to me, it wasn’t worth 99 cents/month. The Netflix rep gave me the party line about how they were now delivering more content via stream than DVDs. I asked if they offered a DVD-only plan. He said that for $5.99/month, I could rent one-disc-at-a-time with a max total of 2 discs per month with no streaming. That’s about 3X the price of Blockbuster Express or Redbox, so I canceled my 10+ year old Netflix account. I found out later that they had also agreed not to release the newest DVDs for 30 days. That’s why the latest DVDs are available at BB Express and Redbox sooner than from Netflix. I understand that the cost of delivering stream content is much cheaper than DVDs, but the cost of licensing stream content is rising astronomically. When they signed the original Starz contract several years ago, before anyone had any idea what that content was worth, they paid Starz (which included Disney and Sony titles) about $30 million/year for unlimited viewing. Recently, Starz rejected an offer for $300 million/year, illustrating the eye-popping rise in licensing stream content. I suspect that Netflix’s financial results for the first quarter following the recent price hike will show an increase in revenue. But, as the full impact of the price hike hits home, more subscribers may decide that they can live without Netflix. Time will tell whether this recent pricing move is just a hiccup or a serious, potentially debilitating, stumble. I, for one, do not miss my Netflix.

As a NetFlix user, I think the idea that NF is steering customers toward streaming is only half-right. Along with cutting out DVD rentals, those of use who went with streaming only cannot stream Blu-Ray titles. While this may not be a concern to many people, it was a slap in the face to me and my family. The next company who offers streaming only AND availability of Blu-Ray will get my business, even if I have to pay a dollar or two more per month.

Apple iTunes is a better deal. You have to pay more for each title, sure, but Netflix practically makes it your JOB to watch movies. I mean, you always feel like a sucker if you don’t watch the movie right away and send it back (regular DVD service). And you pay even if you are on vacation, really busy at work, regardless.

Apple iTunes (right on your TV with $99 Apple TV which you need for Netflix anyhow–the other options are pathetic by comparison) has TONS more movies for $2.99 (Standard def, pretty decent really) or $3.99 for HD. You can also buy for about $14 a title (kids movies or anything you are going to want to keep around).

The selection for streaming simply isn’t there on Netflix, and it’s getting worse. iTunes has pretty much anything you can get on DVD.

What will happen when the US postal service finally realizes they can’t afford to deliver mail on Saturday? This is why I sold my NFLX.

Great concept, poor timing. They should have made sure their streaming content was much more extensive prior to making such a drastic decision. Oops. They will recover, 4% doesn’t break revenue expectations.

Yes they did, no one wants to pay more for less. Limited content on streaming, restrictions on DVD are a no win solution. There will be someone who will capitalize on this and we will have a better option soon.

Timing is everything, and Netflix mgmt. timing this move during a down economy, alientating customers, while competition is ramping up shows a boneheaded lack of grasp of the value of customer loyalty, and how to manage change in a changing market. The gloss is off Netflix. All they can do is apologize again, this time more convincingly, and retract. The move was timed badly and handled worse, calling other management decisions into question.